# Public Housing Capital Fund Program > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2013-23230 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** October 24, 2013 - **Citation:** 78 FR 63748 ## Text DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 24 CFR Parts 903, 905, 941, 968, and 969 [Docket No. FR-5236-F-02] RIN-2577-AC50 Public Housing Capital Fund Program AGENCY: Office of the Assistant Secretary for Public and Indian Housing, HUD. ACTION: Final rule. SUMMARY: This final rule combines and streamlines the former legacy public housing modernization programs, including the Comprehensive Grant Program (CGP), the Comprehensive Improvement Assistance Program (CIAP), and the Public Housing Development Program (which encompasses mixed-finance development), into the Capital Fund Program (CFP). This rule defines qualified PHAs, which are not required to file annual plans. The rule expands HUD's current requirement that a Public Housing Authority (PHA) submit a physical needs assessment (PNA) to include small PHAs as well as large PHAs, but provides small PHAs additional time to plan for and implement this requirement. The rule allows PHAs to request a total development cost (TDC) exception for integrated utility management, capital planning, and other capital and management activities that promote energy conservation and efficiency, including green construction and retrofits, which include windows; heating system replacements; wall insulation; site-based generation; advanced energy savings technologies, including renewable energy generation; and other such retrofits. The rule also makes changes to replacement housing factor funds and the threshold for management improvements. Because this rule streamlines programs, several formerly separate regulations are eliminated with the implementation of this rule. DATES: Effective date: November 25, 2013. The incorporation by reference of certain publications listed in the rule is approved by the Director of the Federal Register as of November 25, 2013. FOR FURTHER INFORMATION CONTACT: Jeffrey Riddel, Director, Office of Capital Improvements, Office of Public and Indian Housing, Department of Housing and Urban Development, 451 7th Street SW., Washington, DC 20410-8000; telephone number 202-708-1640 (this is not a toll-free number). Hearing- or speech-impaired individuals may access this number through TTY by calling the toll-free Federal Relay Service at 800-877-8339. SUPPLEMENTARY INFORMATION: This final rule follows a February 7, 2011, proposed rule and makes changes in response to public comment on the proposed rule and further consideration of issues by HUD. I. Executive Summary A. Purpose of the Regulatory Action This final rule implements section 9 of the United States Housing Act of 1937 (the 1937 Act), which created the CFP as part of the Quality Housing and Work Responsibility Act of 1998 (title V, Pub. L. 105-276, approved October 21, 1998). The Capital Fund consolidated the former public housing modernization programs, including the Comprehensive Grant Program (CGP), the Comprehensive Improvement Assistance Program (CIAP), and the Public Housing Development Program (which encompasses mixed-finance development). In 2008, the Housing and Economic Responsibility Act (HERA) (Pub. L. 110-289, approved July 30, 2008) made changes to the CFP, namely the removal of the former emergency set-aside for natural disasters and emergencies, and the creation of a category of “qualified PHAs,” smaller PHAs that are relieved from certain paperwork submission requirements. To date, there has been no comprehensive regulation implementing these statutory requirements and updates. Thus, rather than a comprehensive, user friendly regulation, PHAs have been required to use annual processing notices to supplement outdated regulations in various parts of title 24 of the Code of Federal Regulations (CFR), including parts 905, 941, and 965. This regulation is necessary to consolidate the legacy modernization programs in one part of the CFR and to update the regulations in accordance with current law. An updated regulation with current program requirements is needed to provide new staff members with the knowledge necessary to manage the Capital Fund and Mixed Finance Development programs proficiently. In addition, the regulated community needs a single, clear, updated regulation in order to have complete and current information. The Capital Fund formula itself, currently codified at 24 CFR 905.10, is reorganized at § 905.400. This formula includes a number of coefficients that are to be inserted into the equation. These coefficients are unchanged by this rule. The coefficients were defined as part of a negotiated rulemaking that occurred in 1999 and 2000. The proposed rule can be found at 64 FR 49924 (September 14, 1999) and the final rule can be found at 65 FR 14426 (March 16, 2000). B. Summary of the Major Provisions of the Regulatory Action This rulemaking: Establishes a new definition section and proposes several new definitions to be included in the section; clarifies Capital Fund eligible and ineligible activities, and incorporates energy efficiency standards; incorporates into part 905 of public housing modernization the regulations at 24 CFR part 968, which part is removed by this final rule; incorporates the development and mixed-finance development requirements of part 941, which also is removed; expands the requirement for a PNA to include small, as well as large, PHAs (specific requirements pertaining to the PNA will be addressed in a separate rulemaking), but delays the applicability of this provision for small PHAs until 30 days after the end of a federal fiscal year quarter following HUD's publication of a notice in the Federal Register announcing application of the provision. The rulemaking also incorporates by reference the 2009 International Energy Conservation Code (IECC) and American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) standard 90.1-2010, “Energy Standard for Buildings Except Low-Rise Residential Buildings.” The ASHRAE standard can be found at http://www.ashrae.org/standards-research-technology/standards-guidelines . The 2009 IECC can be purchased at http://shop.iccsafe.org/ . This rulemaking also: Clarifies the calculation of TDC limits and establishes the ability for PHAs to request a TDC exception for integrated utility management, capital planning, and other capital and management activities that promote energy conservation and efficiency; establishes 5 years of a Demolition or Disposition Transitional Funding (DDTF) grant that will be included in the regular Capital Fund formula grant, to replace the Replacement Housing Factor (RHF) grant of up to 10 years; provides for a DDTF transition period; clarifies at § 905.202(b) that because of their emergent nature, emergencies that are not identified in the 5-year action plan (statutorily required by section 5A of the 1937 Act) are eligible costs; revises the description of eligible amenities at § 905.202(c); phases in over 5 years a cap of 10 percent of a PHA's Capital Fund that the PHA may expend on management improvements; and revises the identity of interest regulations in accordance with HUD's actual practice to provide PHAs with the flexibility to use an instrumentality as a general contractor in mixed-finance projects, as long as cost requirements are met, without having to request a waiver. C. Costs and Benefits This rule does not have any direct financial impact on the level of funding for the CFP, but has the potential to create some financial transfers among program participants of less than $100 million annually. The rule will cap management improvement expenditures from the Capital Fund at 10 percent, phasing in the cap over 5 years. On average, PHAs use approximately 8 percent of their Capital Fund grants on management improvements, with many PHAs using considerably less, and larger PHAs of more than 250 units using 9 percent. The 10 percent cap would not cause significant transfers outside of the CFP, though the 10 percent cap would require significant expenditure changes for some PHAs that spend a high percentage of their Capital Fund grants on management improvements. This final rule will also have significant benefits. This rule updates and consolidates the CFP regulations and related regulations having to do with the use of Capital Funds for development and modernization, as well as regulations for continuing operation of low-income housing after completion of debt service. In addition, the rule codifies recent statutory requirements enacted in HERA. The benefits of the rule such as regulatory consolidation, program clarification, removal of obsolete references, and enhanced efficiencies justify the promulgation of this rule. II. Background Section 9 of the U.S. Housing Act of 1937 (1937 Act) (42 U.S.C. 1437g) is the statutory basis for the Public Housing Capital Fund (Capital Fund) and the Public Housing Operating Fund (Operating Fund). The Operating Fund is established by Section 9(e) of the 1937 Act, and the Capital Fund, which is the focus of this rule, is established by section 9(d) of the 1937 Act (42 U.S.C. 1437g(d)). Section 9(d) lists the various items for which the Capital Fund may be used, including development, modernization, maintenance, vacancy reduction, code compliance, demolition and replacement, homeownership activities, and energy efficiency, among others. Other important provisions found in section 9(d) of the 1937 Act are: The requirement for HUD to develop a formula to determine the amount of Capital Funds that are allocated to PHAs in each fiscal year (42 U.S.C. 1437g(d)(2)); flexibility for a small PHA to use up to 100 percent of its Capital Fund grant and for a large PHA to use up to 20 percent of its Capital Fund grant for purposes ordinarily pertaining to the Operating Fund (section 9(g) of the 1937 Act pertaining to limitation on use of funds; 42 U.S.C. 1437g(g)); and penalties for the slow obligation and expenditure of Capital Funds (section 9(j) of the 1937 Act, 42 U.S.C. 1437g(j). All of these requirements based in statute and others added by regulation constitute the CFP. Additionally, due to changes made to the annual plan statutorily required of PHAs (PHA Annual Plan) by section 5A of the 1937 Act, and the need to have grant reporting in compliance with the requirements of the CFP, and other federal reporting requirements, the CFP informational requirements will be decoupled from the PHA Annual Plan requirements. HUD will make necessary changes to the HUD forms involving the CFP budget and reporting requirements. Section 2702 of the HERA amended section 5A of the 1937 Act (42 U.S.C. 1437c-1) to provide that certain PHAs, called “qualified PHAs,” are not required to file the PHA Annual Plan called for in section 5A(b)(1) of the 1937 Act (42 U.S.C. 1437c-1(b)(1)), although these PHAs, along with nonqualified PHAs, must file the 5-year plan and a civil rights certification required under section 5A(d)(16) of the 1937 Act, 42 U.S.C. 1437c-1(d)(16). Qualified PHAs under section 2702 are those that administer 550 or fewer units—considered as the sum of all the public housing units and vouchers under section 8(o) of the 1937 Act (42 U.S.C. 1437f(o)) (section 8) administered by a PHA—and which are not designated as a troubled PHA under section 6(j)(2), and which do not have a failing score under the Section 8 Management Assessment Program (SEMAP) during the prior 12 months. Please see the preamble to the proposed rule of February 7, 2011 (76 FR 6654-6682), for further discussion of the statutory background. III. The Proposed Rule Significant changes to the CFP regulations that were proposed by the February 7, 2011, rule included the following: • Establishment of a new definition section and proposing several new definitions to be included in this section. • Clarification of Capital Fund eligible and ineligible activities and incorporating energy efficiency standards. • Incorporation into part 905 of public housing modernization the regulations at 24 CFR part 968, which part is removed by this final rule. • Establishment of annual plan submission requirements for nonqualified PHAs as defined in section 2702 of HERA and Capital Fund submission requirements for qualified and nonqualified PHAs. • Expansion of the requirement for a PNA to include small, as well as large, PHAs. The requirements pertaining to PNA may be addressed in a separate rulemaking. 1 1 Part 968 promulgated December 21, 1989, instituted a requirement for large (Comprehensive Grant) PHAs to complete a PNA as a part of the Comprehensive Plan (see 968.315(e)(2). This rule does not add new PNA requirements for large PHAs but rather continues the current requirements with the only change being that small PHAs will also have to comply with those requirements. The current PNA requirements include completion of a brief summary of the physical improvements needed to bring each development to HUD standards for modernization, energy conservation life-cycle cost effective performance standards, and lead-based paint testing and abatement standards; the replacement needs of equipment and structural elements during the period covered; a preliminary estimate of cost; any physical disparities between buildings occupied predominantly by one racial or ethnic group and the physical improvements required to correct the disparity; and the number of units the PHA is proposing for substantial rehabilitation and subsequent sale, if any. • Clarification that Energy Star appliances and systems, and cost-effective energy measures, are eligible costs. • Incorporation of the IECC and American Society of Heating, Refrigerating, and ASHRAE standard 90.1-2010, “Energy Standard for Buildings Except Low-Rise Residential Buildings.” The ASHRAE standard can be found at http://www.ashrae.org/standards-research-technology/standards—guidelines . The 2009 IECC can be purchased at http://shop.iccsafe.org/ • Clarification of the calculation of TDC limits and establishment of the ability for PHAs to request a TDC exception for integrated utility management, capital planning, and other capital and management activities that promote energy conservation and efficiency. • Limitations on the number of years that PHAs will receive RHF grants. • Provision for RHF transition funding for PHAs that have already begun receiving RHF funding grants at the time the new 5-year program comes into effect. Those PHAs would receive 10 full years of replacement funding. • Setting of costs limits for the CFP fee at 10 percent of the annual Capital Fund grant. • Reduction of the amount of the grant that may be spent on management improvements from 20 percent to 10 percent over a 3-year period. • Revisions to the requirements for timely obligation and expenditure of Capital Funds currently found at 24 CFR 905.120. • Incorporation of the design and construction requirements currently found in 24 CFR 941.203 into part 905. • Establishment of requirements for funding Resident Management Corporation (RMC) activities. • Establishment of rules on contracting requirements and the use of force account labor. • Incorporation of development requirements, including those pertaining to mixed-finance projects. • Implementation of section 35(h) of the 1937 Act, 42 U.S.C. 1437z-7(h), allowing for deviations from Public Housing Requirements, under specified conditions, to ensure the long-term feasibility of mixed-finance projects, while still ensuring certain tenant protections. • Prohibition on a PHA pledging its assets without written HUD approval. • Establishment of sanctions for noncompliance with HUD contracts and regulations. IV. Summary of Significant Changes in This Final Rule The following changes were made to the proposed rule at this final rule stage: • Revises the definitions of Capital Fund Annual Contributions Contract (CF ACC); Public Housing Requirements; Qualified PHA; and public housing funds. This final rule adds a definition of Declaration of Trust (DOT) and of Declaration of Restrictive Covenant. • Clarifies that the provisions of direct social services and the costs for security guards or ongoing security services are not eligible management improvements. • Provides, as one option to the guaranty of irrevocability of funding, that the required letter of credit is to be valued at 10 percent of the contract price (the proposed rule would have required a letter of credit to be valued at 25 percent of the contract price). • Clarifies at § 905.202(b) that because of their emergent nature, emergencies that are not identified in the 5-year action plan (statutorily required by section 5A of the 1937 Act) are eligible costs. • Revises the description of eligible amenities at § 905.202(c). • Implements, over a 5-year time period, a 10 percent cap on the amount of Capital Funds that a PHA may spend on management improvements. (In contrast, the proposed rule would have implemented this cap over 3 years.) • Establishes 5 years of a DDTF grant that will be included in the regular Capital Fund formula grant. Since DDTF will be included in the formula grant, the DDTF grant will not be subject to the same requirements as the RHF grants and will be usable for modernization as well as development. PHAs will be able to use the DDTF for any eligible activity under the CFP and this funding will not be subject to accumulation, although the DDTF grant will be subject to the same statutory requirements as any Capital Fund grant and the terms of the appropriation of Capital Funds from Congress. In addition to the above listed changes, the following changes are also made via the final rule. The final rule delays the applicability of § 905.300(a) for small PHAs. HUD is taking this action to provide small PHAs additional time to prepare for the implementation of the requirement to submit a PNA. Specifically, small PHAs will be subject to this provision 30 days following the end of a federal fiscal year quarter following HUD's publication of a notice in the Federal Register announcing application of the provision. Moreover, HUD plans to delineate a time frame for submission of a PNA such that the first submission by a small PHA would not be sooner than 6 months after the end of the federal fiscal quarter. The final rule gives PHAs more time to prepare for the change to DDTF. Starting in Fiscal Year (FY) 2014, PHAs that would be newly eligible for RHF funding will receive instead 5 years of DDTF. In FY 2014, if a PHA has one or more years of first-increment RHF funding, the PHA will receive the remaining years of first-increment RHF and an additional 5 years of DDTF. If, in FY 2014, a PHA has already started receiving second increment RHF funding, the PHA will receive the remaining years of second increment RHF funding. An Excel spreadsheet that describes the impact of HUD's changes to DDTF is available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/public_indian_housing/programs/ph/capfund . The final rule provides that PHAs that remove units because of homeownership are not eligible for replacement funding under an RHF. This final rule corrects an error in proposed § 905.602(b), that addressed limitations on new construction. In the proposed rule, acquisition was improperly excluded from the limitations. HUD's interpretation of construction in this context, as including acquisition, was properly reflected in the regulatory preamble of the February 7, 2011, proposed rule at 76 FR 6654, third column, which stated as follows: Section 9(g)(3) of the 1937 Act (42 U.S.C. 1437g(g)(3)) imposes limitations on the use of the Capital Fund or Operating Fund for new construction. Generally, the CF formula shall not provide PHAs funding for the purpose of constructing public housing units (which includes acquisition), if the construction would result in a net increase from the number of housing units owned, operated, or assisted by the PHA on October 1, 1999. . . .” However, the rule text at proposed § 905.602 did not correctly reflect this interpretation. This error is corrected in final rule § 905.602(b). The final rule makes changes to proposed § 905.604(n), which addressed deviations from HUD requirements under 35(h) of the 1937 Act (see 42 U.S.C. 1437z-7(h)). The proposed rule would have required that to allow for deviations in a mixed-finance project because of a change in appropriations or other change in law preventing a PHA from providing Operating Funds, at least 20 percent of the units must be nonpublic housing rental units. In addition, the proposed rule would have predetermined specific allowable deviations. Some commenters objected to the 20 percent threshold and the limited allowable deviations. This final rule allows for more flexibility. As the statute provides, there must be a “significant number” of units that are not public housing. Rather than specific allowable deviations, the PHA, on behalf of the mixed-finance owner entity (Owner Entity) would submit an Alternative Management Plan to HUD, which would explain the reasons for the deviation and the proposed changes, among other details (see § 905.604(k) of this final rule). This final rule revises the identity of interest regulations in accordance with HUD's actual practice. This revision provides PHAs with the flexibility to use an instrumentality as a general contractor in mixed-finance projects, as long as cost requirements are met, without having to request a waiver. The identity of interest general contractor must have submitted the lowest bid in response to a request for bids, or, in the alternative, the PHA must submit a written justification to HUD, including an independent cost estimate, that demonstrates that the identity of interest general contractor's costs are less than or equal to the independent third party cost estimate. Identity of interest contractors will be considered by HUD as part of the development proposal approval. Since 2008, HUD has consistently granted waivers to allow this procedure to be followed; 45 waiver requests have been granted, and no waiver request was denied in that period. Additionally, HUD previously published this provision for comment (see HUD's proposed rule entitled “Streamlining Public Housing Programs” (FR-4990-P-01), published on August 8, 2008, at 73 FR 45373 and, generally, received supportive comments. The comments on the 2008 proposed rule can be found at http://www.regulations.gov. V. The Public Comments The public comment period on the proposed rule closed on April 8, 2011, and 45 public comments were received. Comments were received from a variety of stakeholders, including PHAs, trade associations, housing advocates, and individuals. Definitions (§ 905.108) Issue: The proposed definition of “Capital Fund Annual Contributions Contract (CF ACC)” appears to conflate the definition of the entire ACC (which is a contract addressing the operation of public housing) with that of a Capital Funds amendment (presumably limited to the special terms applicable to the provision of Capital Funds). HUD Response: To avoid possible ambiguity, this final rule modifies the proposed definition of CF ACC to more clearly indicate that this is an amendment to the Consolidated Annual Contributions Contract (Consolidated ACC). It should also be noted that the ACC is a grant agreement that addresses not only the operation of public housing but also the development and modernization of public housing. Issue: The definition of “development” in § 905.200(b)(2) appears to be limited to activities to add units to inventory; notwithstanding the reference to nondwelling facilities, it is unclear what else might be covered given the limiting phrase. Also, the definition of “development” should include a facility that is being modernized. HUD Response: The reference to “development” in this paragraph is in the context of eligible housing, not a general definition of development, and is part of a larger list of eligible activities. The paragraph states that the eligible activities under the rubric of development include “construction and acquisition with or without rehabilitation; any and all undertakings necessary for planning, design, financing, land acquisition, demolition, construction, or equipment, including development of public housing units, and buildings, facilities, and/or related appurtenances (i.e., nondwelling facilities/spaces). Development of mixed-finance projects includes the provision of public housing through a regulatory and operating agreement, master contract, individual lease, condominium or cooperative agreement, or equity interest.” Issue: The definition of “Community Renewal Costs” in § 905.108 states that Capital Funds may be used for community renewal costs, but not what those costs are, which makes it difficult to apply the TDC formula at § 905.314(e). The commenter states that this term should be defined. HUD Response: Community Renewal costs consist of the sum of the following HUD-approved costs related to the development of a public housing project: planning (including proposal preparation), administration, site acquisition, relocation, demolition, and site remediation of environmental hazards associated with public housing units that will be replaced on the project site, interest and carrying charges, off-site facilities, community buildings and nondwelling facilities, contingency allowance, insurance premiums, any initial operating deficit, on-site streets, on-site utilities, and other costs necessary to develop the project that are not covered under the ACC. This final rule adds this information to the definition. Issue: The definition of “Public Housing Requirements” should be revised to specifically reference the Consolidated ACC and all amendments, rather than referring to the CF ACC Amendment without the underlying document. If there is intended to be a split between the CF ACC Amendment and the Mixed-Finance ACC Amendment, references to the CF ACC should be corrected accordingly. The definition should read: Public Housing Requirements. All requirements applicable to public housing including, but not limited to, the 1937 Act; HUD regulations; the Consolidated Annual Contributions Contract, including amendments; HUD notices; and all applicable federal statutes, executive orders, and regulatory requirements, as these requirements may be amended from time to time. HUD Response: HUD accepts this recommendation and the change is incorporated into the definition at § 905.108. Issue: HUD's regulation at § 903.3 does not directly define the term “qualified” PHA. The commenter recommends that to make the final rule transparent and conducive to public understanding, it should list the 3 factors necessary for a small PHA to be “qualified” in order to avoid having a PHA Annual Plan. The commenter additionally notes that while the proposed rule's summary and overview declare that the proposed PHA Annual Plan change would merely incorporate the definition of “qualified PHA” in the PHA Annual Plan regulation at § 903.3, the actual proposed rule text removes the current subsection explaining the purpose of the PHA Annual Plan. HUD Response: For ease of use and transparency, this final rule incorporates the definition of “qualified PHA” that is provided in § 903.3, which, in turn, adopts the statutory definition for this term in section 2702 of HERA (codified at 42 U.S.C. 1437c-1(b)(3)(C)), rather than relying on a cross-reference: The term “qualified PHA” means a public housing agency that meets the following requirements: (1) The sum of the number of public housing dwelling units administered by the agency, and the number of vouchers under section 8(o) of the United States Housing Act of 1937 (42 U.S.C. 1437f(o)) administered by the agency, is 550 or fewer; and (2) The agency is not designated under section 42 U.S.C. 1437d(j)(2) as a troubled public housing agency and does not have a failing score under SEMAP during the prior 12 months. Issue: The definition of “Owner Entity” requires that the rule make clear, either in the definition or elsewhere, that a mixed-finance development can be owned by an Owner Entity, a PHA, or, alternatively, an instrumentality. HUD Response: HUD has clarified the definition of Owner Entity as it relates to mixed-finance in §§ 905.108 and 905.604(a)(1). Issue: In proposed § 906.604(b)(4), the definition of “participating party” is overbroad. HUD Response: This term is no longer used this final rule. Issue: The rule should include a definition of “partners,” used in § 905.108; a definition of “declaration of trust”; a definition of “modernization”; and a definition of “mixed-finance modernization.” HUD Response: “Partner” was proposed to be defined in § 905.604(b); however, because the term applies elsewhere, this final rule moves the definition to § 905.108. “Mixed-finance modernization” is defined at § 905.108, 905.200 and 905.604. Definitions of “Declaration of Trust” and “modernization” are added to this final rule at § 905.108. Issue: The definition of “public housing” excludes HOPE VI and other non-Capital Fund assistance that HUD regulates. HUD Response: To capture the Public Housing Funding that HUD regulates, this final rule defines “public housing funds” in a more inclusive manner at § 905.108 to include HOPE VI and other funds appropriated for public housing uses, including development, rehabilitation, and operations. Total Development Cost (TDC) Issue: Several commenters expressed support for limiting modernization costs to 90 percent of TDC as well as for the TDC exception in § 905.314(c) for integrated utility management, capital planning, and other capital and management activities that promote energy conservation and efficiency, including green construction and retrofits. One commenter, however, stated that there is a lack of clarity in the language of § 905.314(c) because the terminology varies between “exception” and “waiver,” where a waiver is normally a more formalized process than a simple regulatory exception. HUD Response: This final rule retains the 90 percent of TDC threshold for modernization. On the issue of exception or waiver, the commenter is correct, “exception” is the correct term and is used in § 905.314(c) of this final rule. Issue: One commenter states that while the rule deals with Capital Funds, it should also include other sources of funding for public housing such as HOPE VI, Choice Neighborhoods, “Development funds,” and any other sources that may become available in the future. The commenter states, for example, § 905.314(c), on TDC, currently covers only development with Capital Funds and that this section should be revised to include all public housing funding sources. HUD Response: HUD agrees that, because of the federal interest in maximizing the use of funds, TDC applies to all public housing funds and revises § 905.314(c)(1) of this final rule accordingly. Issue: Heating-and-cooling-degree-days should continue to be an essential factor when considering exceptions to TDC. The unique expenses associated with implementing energy-saving and green features that represent high front-end costs, which may or may not be “cost saving sensitive” but are highly sensitive to depleting energy sources, should be treated similarly. The commenter states that the rule should directly and specifically address the eligible high front-end expenses when green features emphasize renewable energy sources that far exceed TDC, in exchange for preserving the other energy sources that are depleting. HUD Response: This final rule provides for a TDC exception for integrated utility management, capital planning, and other capital and management activities that promote energy conservation and efficiency. HUD believes that, rather than trying to address each possible special case in the rule, this exception preserves PHA discretion to address the commenter's concern as well as other similar concerns that may arise in individual cases. Contracts and Contracting Issue: This commenter states that the proposed rule should subordinate its terms for a covenant to the terms of the financing deal for development. As for the covenant for modernization, it should subordinate such terms only when Capital Fund financing is involved in the modernization of the property. The commenter states that for all other cases it would appear that the 20-year covenant for modernization could then be a reasonable provision for inclusion in a final rule. HUD Response: Section 9(d)(3)(B) of the 1937 Act (42 U.S.C. 1437g(d)(3)(B)) requires use restrictions to remain on the property for 20 years from the date that modernization is completed with Capital Funds on any public housing or portion thereof. HUD retaining a priority position as to HUD's financing ensures that the low-income use requirements will continue to be met. HUD has interpreted the 1937 Act to allow appurtenances to be excepted from the definition of public housing (e.g., nondwelling properties such as administrative buildings) which, if included in public housing, would have had to remain under the Declaration of Trust for 20 years from the latest date on which modernization is completed, but may have liens prior to the Declaration of Trust. Issue: The proposed regulation at § 905.316(a), which provides that PHA procurement must comply with 24 CFR part 85, should be limited to activities funded with Capital Funds. HUD Response: Section 905.31(a) explicitly refers to public housing capital activities; no further clarification is necessary. Issue: A commenter stated that § 905.316(d)(2)(iv), which refers to irrevocable letters of credit as an assurance of completion, is insufficient because the specific terms are not stated. The rule should require that, before accepting a letter of credit, the PHA have its counsel review the proposal form and opine that the PHA and HUD are fully protected under its terms. Another commenter stated that the 25 percent requirement is inconsistent with modern private sector practice and imposes extra costs that do not materially increase the PHA's security, and, in the context of mixed finance, is unnecessary because the tax credit investors have a strong monetary interest in completion. HUD Response: The main condition that HUD is concerned about, as stated in the rule, is irrevocability. The letter of credit is only one option for the assurance, and the PHA may select one of the other options. Therefore, HUD does not believe a change is necessary regarding further specificity of the terms. However, HUD agrees to lower the percentage requirement to reflect modern practice, and this final rule now requires a 10 percent irrevocable letter of credit at § 905.316(d)(iv). Issue: Proposed § 905.308(b)(4) appears to be an incredible expansion of prevailing wage rate requirements, since it appears to apply to third party contracts and to professionals. The commenter requests clarification as to whether, under this section, architects, engineers and technicians must be paid the prevailing wage rates and questioned how to find those rates. HUD Response: The commenter is incorrect; HUD is not expanding the Davis-Bacon wage rate requirements in this rule. These are standard Davis-Bacon provisions and are required by statute; specifically, as Davis-Bacon requirements related to HUD-funded projects under the 1937 Act (42 U.S.C. 1437j(a)). Guidance can be found at the Department of Labor's wage rate site, http://www.wdol.gov/. HUD also has a Web page with Davis-Bacon information at http://portal.hud.gov/hudportal/HUD?src=/program_offices/labor_relations. Issue: One commenter asked whether § 905.326, which imposes a 5-year time frame for record retention, intends to add an additional 2 years to the record retention required under 24 CFR 85.36(i)(11) and 85.42(b). HUD Response: Yes, based on the life cycle of Capital Funds, this rule adds 2 years to the 3 years required under 24 CFR part 85, for a total of 5 years. Issue: As to § 905.318, a commenter states that a title insurance policy is not available before a PHA takes title. HUD Response: Title insurance is required at the time the property is acquired by the PHA. This final rule makes this clarification. Forms Issue: The definition of “Cooperation Agreement” references a form prescribed by HUD, form HUD-52481, which is available in HUDClips ( http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/forms/), but one commenter stated that the form states that it is a drafting guide. HUD Response: This form has always been a guide because State and local law must be considered as well. Many PHAs have used this form “as is” and that is acceptable as long as it conforms to State and local law. Issue: One commenter stated that there should be an exception for the use of American Institute of Architects forms, such as AIA-B108-2009 under § 905.316(b)(use of HUD-prescribed contract forms). A commenter stated that one of HUD's proposed changes to part 905 would require that PHAs nationwide use standard mandated contract forms. The commenter states that while PHAs should be required to incorporate certain terms and conditions in their contract, they must also have flexibility to address local legal requirements, which may vary from state to state. HUD Response: HUD-prescribed contract forms include necessary federal and Public Housing Requirements. HUD intends to limit the use of contract forms to HUD forms, because nonstandard and local forms do not reflect the appropriate federal limitations. Therefore, HUD has not changed the form requirements. Issue: The rule is inconsistent with respect to references to ACC forms. The rule refers variously to a mixed-finance ACC Amendment (§ 905.604(k)(2)), ACC Amendment (throughout § 905.604(k)), and CF Amendment (§ 905.612(b)) in closely related provisions. The rule seems to suggest that it intends to replace 3 ACC forms currently in use with a single CF ACC amendment, but is inconsistent in this respect. HUD Response: It is not the intention of this rule to replace the 3 ACC forms with a single ACC Amendment. There is one consolidated ACC, and separate ACC Amendments for different sections of the program. A definition of ACC Amendment has been added to § 905.108. There are separate ACC Amendments for the various areas of the Capital Fund Program (CFP), including but not limited to the CFP annual formula grant, CFP annual RHF grants, the Capital Fund Education and Training Community Facility Program grants that were awarded, and mixed-finance grants. Replacement Housing Factor (RHF) Issue: Reduction in RHF grant. PHAs that have a reduction in units due to demolition and disposition have been eligible for an additional grant, the RHF grant. PHAs have been entitled to an initial 5 years of RHF funding and an additional 5 years of RHF funding if certain conditions are met. The rule proposed, for units demolished or disposed of on or after the effective date of this rule, to reduce the RHF to 5 years of funding, in total. One commenter observed that this change would have a positive impact on the availability of Capital Funds. Several other commenters, however, objected to this change and stated that RHF funding should be standardized to 10 years because RHF funding is the best approach for developing replacement housing, and many PHAs have compelling reasons for demolishing or disposing of public housing property and need this resource, which is one of the few resources remaining to assist with new public housing. There are still thousands of distressed housing units, and until these can be improved, RHF funding should continue at 10 years. PHAs have a capital backlog of an estimated $32 billion and an average of 10,000 units are lost each year. RHF funding adds up to a vital resource over the course of 10 years, especially given the uncertainty of funding from year to year. PHAs cannot count on an award of HOPE VI or Choice Neighborhood grants, because they are scarce and directed to certain types of projects. The RHF constitutes the only resource available that is dedicated to replacement public housing, and is an important resource for PHAs that do not have HOPE VI funds. One commenter stated that because the funding is only paid to PHAs that have removed units, without HUD development funds it can take years to develop a viable, fundable plan to for replacement housing. One commenter stated that a PHA cannot count on other resources, and that RHF “constitutes the only resource available that is dedicated to replacement public housing. HUD has not done a study of RHF, including its leveraging effectiveness, and has not established a sound basis for dramatically cutting this much-needed resource.” Even with 10 years' worth of funding, agencies must look for other resources, and thus it is not sensible to reduce the amount provided by the RHF even more. HUD Response: While the RHF is an important tool for development of replacement housing, in the current limited funding environment, the need for replacement housing for a few PHAs has to be balanced with the needs of the majority of PHAs whose Capital Funds modernize existing public housing. These needs are quantified in a study released in June 2011 on modernization needs, “Capital Needs in the Public Housing Program,” prepared by Abt Associates, available at http://portal.hud.gov/hudportal/documents/huddoc?id=PH_Capital_Needs.pdf. The study found that the Nation's 1.2 million public housing units have an estimated total of $25.6 billion in existing capital needs. Regarding demolition and disposition needs, the Capital Fund and other sources of funding, such as section 8 funding for replacement housing, can be used to meet these needs. The change in the RHF will result in an increase in Capital Funds, which is a more flexible resource. However, given the significance of the change, this final rule allows for a longer transition period than proposed. PHAs that would be newly eligible for RHF funding in Federal Fiscal Year (FFY) 2014 will instead receive 5 years of DDTF from the Capital Fund. The Federal Fiscal Year is defined in § 905.108 of this rule as the fiscal year that begins each year on October 1 and ends on September 30 of the following year (PHA fiscal years can have different beginning and ending dates). PHAs that have already begun receiving first-increment RHF funding by FFY 2014 will receive the remainder of their first increment and 5 years of DDTF. If a PHA is already receiving second-increment RHF funding by FFY 2014, it will receive the remainder of its second-increment RHF funding. DDTF funding would have fewer limitations than RHF funding, in that it could be used for modernization needs (of which there is a substantial backlog) as well as development; at the same time, statutory requirements applicable to the Capital Fund, such as the requirements for expenditure and obligation in section 9(j) of the 1937 Act (42 U.S.C. 1437g(j)), will apply. This is a generous transition and should ameliorate the issues discussed by the commenters. Issue: Scattered site replacement housing. One commenter stated that eliminating 5 years of RHF funds would tie the hands of PHAs that replace older public housing units with new scattered-site units. Such units may take years to come online and that the local housing opportunities commission is inclined to pass over units in areas with a high affordable housing concentration in favor of units in wealthier areas. The commenter also stated that reducing the time frame for RHF funding may restrict efforts to develop mixed-finance developments that include some public housing because such deals and regulatory regimes are complex. HUD Response: Firstly, if the PHA in question has already received at least one year of RHF funding as of the effective date of this final rule, the PHA will be eligible under § 905.400(k) for an additional 5 years of RHF funding. Secondly, the change in RHF grant funding will increase the amount of Capital Funds, which is a more flexible resource that, unlike RHF funds, can be used for any Capital Fund purpose, be it development or modernization. This flexibility is particularly important in the case of smaller PHAs whose RHF funds typically are not enough at any one time to engage in development activities. In many cases, by the time these unused funds are recaptured by HUD, they are lost to their intended use for assisted housing because the life cycle of the funding has expired and the funds must be returned to the Department of the Treasury as general revenues. Under DDTF, PHAs in this situation will be able to use the funds for modernization needs, thus assuring that funds intended for housing needs actually go to that purpose. Also, because these funds are, in fact, Capital Funds and not part of a separate appropriation, the phased-in decrease to 5 years means that there will be more Capital Funds available to all PHAs receiving Capital Fund grants. Issue: Grandfathering. Commenters stated that PHAs currently receiving RHF grants should retain their full 10 years of eligibility. HUD Response: Under this final rule, PHAs that have received at least one year of RHF funding as of the effective date of this rule will be eligible for 10 years of RHF grants if they meet the regulatory requirements of this rule, including leveraging (see § 905.400(i)). Issue: Accumulation of RHF funds. Commenters stated that 10 years of RHF grants should be “banked” or accumulated on a PHA's behalf, and paid out if the PHA meets obligations to develop one or more HUD-approved mixed-finance projects. HUD Response: Appropriations statutes, not regulations, control the period of availability of federal funds, including Capital Funds; in the case of FY 2010, FY 2011, and FY 2012 Capital Funds, the funds are available only until September 30, 2013; September 30, 2014; and September 30, 2015, respectively (see, respectively, div. A, tit. II, Pub. L. 111-117 (approved December 16, 2009); div. B, tit. I, section 1103, Public Law 112-10 (approved April 15, 2011); and div. C, tit. II, Public Law 112-55 (approved November 18, 2011). This limitation prevents lengthy multiyear accumulations as suggested. Even were the funds involved to be appropriated as no-year funds, as a general matter, HUD finds that it is not appropriate for public funds to remain unobligated and unexpended for long periods of time, a policy also expressed in section 9(j) of the 1937 Act (42 U.S.C. 1437g(j)), which penalizes PHAs for delayed obligation and expenditure of funds. Issue: Reduce administrative costs rather than eliminating RHF grants. Commenters stated that while administering the RHF grants can be cumbersome for HUD, the administration of the program should be simplified rather than HUD reducing the amount made available to the program. The commenters suggested that if the number of units receiving RHF grants is relatively stable from year to year, then after an initial cost, 5 years of RHF funding may not reduce the remaining money in the Capital Fund, while alleviating some of HUD's administrative burden. HUD Response: Administrative costs are not the major contributor to the need to reduce the total number of years of RHF funding. RHF funds and traditional Capital Fund grants are both funded from the same appropriation, which was $2.044 billion in FFY 2011. While RHF is an important tool for development of replacement housing, the need for replacement housing for a few PHAs has to be balanced with the needs of the majority of PHAs whose Capital Funds modernize existing public housing. Reducing RHF grants from 10 years to 5 years will make more funds available for modernization. It is also common for PHAs to accumulate 5 years of funding and then realize there are insufficient funds to develop units and, subsequently, reject the funding, or allow the funding to be recaptured. When this occurs, most of the funding that is returned to HUD must be transferred to the Treasury, and cannot be redistributed because, during the accumulation, the life cycle of the funds from the first and seconds years of second-increment funding will have expired. Regarding administrative costs, the replacement housing policy that is presented in this final rule has been revised from the policy presented in the proposed rule, based on public comment. The revised policy simplifies the administration of the program for both HUD staff and PHAs. While the revised policy will still only provide 5 years of additional funding for units removed from inventory due to demolition or disposition, the limitations on the current RHF funding will be eliminated, allowing PHAs to use the funding for any eligible costs under the Capital Fund program, including development. Issue: Plans for future disposition activities rely upon RHF grants to fund the development of new rental and homeownership units. With the elimination of the one-for-one replacement statutory requirement the need for RHF grants has become greater over time because it provides critical financing to demolish outdated properties. Additionally, the proposed change would make it more difficult to maintain significant numbers of highly subsidized units in mixed-finance properties. HUD Response: Capital Funds and section 8 funds are available for these purposes. Furthermore, this final rule provides for a lengthier transition period and, beginning in FY 2014, DDTF funds that can be used on the same basis as Capital Funds. Issue: RHF grants should not be available for units lost to homeownership, but only for units lost because of demolition or disposition, and should be limited to highly leveraged replacement rental transactions using only HUD's mixed-finance methodology. HUD Response: In this final rule, RHF grants eligibility is based on units lost as a result of demolition and disposition, but not homeownership. In addition, there is a leveraging requirement for PHAs that have already received some RHF funding as of the effective date of this rule and wish to receive an additional 5 years. HUD does not agree that RHF grants should be restricted to mixed-finance as that is overly inflexible. Issue: Second-increment RHF funds continue to be needed to replace housing losses resulting from ongoing, necessary demolition and disposition. PHAs state that they made demolition and disposition plans based on RHF funding being available. HUD Response: As originally designed, the RHF grants were never intended to fund the cost of replacement of every unit demolished or disposed of from the PHA's inventory. However, in order to ease the transition for PHAs that have already demolished or disposed of units that are relying in part on RHF grants, the proposed RHF regulation has been modified in this final rule at § 905.400(j) and § 905.400(k). PHAs that have received at least one year of first increment RHF funding prior to FFY 2014, the proposed effective date of the DDTF, will be eligible to receive up to 10 years of funding for units removed from inventory as a result of demolition or disposition. The additional 5 years of DDTF funding will not be subject to the same restrictions as RHF grants because it will be included in the Capital Fund grant (although it will be subject to the same legal requirements as any Capital Fund grant, including the obligation and expenditure requirements of section 9(j) of the 1937 Act (42 U.S.C. 1437g(j)), and any time limit placed on the appropriation by the applicable appropriations act). It should be noted that the PHA always has the option to use additional Capital Fund formula grant funds as a resource in a mixed-finance transaction. Issue: The change to RHF grants will severely impact bond funding, where the 10 years of RHF grants were a major determinant to the amount of bonds issued. The commenter cites an example in which a “vast majority” of units slated for demolition were demolished well before FY 2010, but, because a few units were not demolished until 2010, the units remained in the Public Housing Information Center (PIC) database in FFY 2010 and would apparently be subject to the proposed rule limiting RHF grants to a single 5-year increment even though 10 years of RHF grants from the demolition of these units had been pledged to an outstanding bond issue. HUD should use the date of the demolition or disposition application, not the date of removal from the PIC system, to determine the applicability of new RHF grant rules. HUD Response: Under this final rule, the postponement of the RHF transition to FY 2014, along with the future provision of DDTF funding, should allow for bond funding to continue. As to the issue of using the date of the application to determine the applicability of new RHF grant rules, the mere existence of an application is far too preliminary a step. First of all, a given application may or may not be approved. Secondly, even if approved, there are cases when demolition does not occur for a considerable period of time, even years. Despite the single example cited by the commenter, the approach that will generally help ensure the best use of public housing funds, and which is the most verifiable, is to base the payment of RHF or DDTF funds on removal of the units from the PIC system. Issue: Due to the federal budget crisis, RHF funding should be eliminated altogether. Since PHAs also receive tenant protection vouchers, the government is “paying double” for each unit removed. HUD Response: Removing RHF funding altogether would have negative consequences for PHAs that have planned demolitions and dispositions based on future availability of RHF grant increments for replacement housing. On the other hand, to the extent possible, in today's funding environment, PHAs must use federal funds to leverage other sources of funding. HUD believes that the RHF transition provisions in this final rule for PHAs already receiving, and relying on, RHF grants offer the best balance between the need to maximize sources of funding and the need to fund adequate replacement housing. PHAs newly coming into the RHF program as of FY 2014 will receive 5 years of more flexible DDTF funds. It should be noted that in order to prevent duplicative funding, RHF and DDTF funding is prohibited for a PHA that will replace units using another source of federal funding (see § 905.400(i)(5)(iii) of this final rule). Issue: HUD has not undertaken a study of the RHF grant program, including its leveraging effectiveness, and has not established a sound basis for dramatically cutting this much-needed resource. HUD Response: HUD has many years of experience with RHF grants and leveraging, which has shown that without leverage it is quite difficult to achieve unit replacement. HUD is not dramatically cutting a much needed resource. Not only will all activities that are currently eligible under the RHF grant program still be eligible under DDTF, but the DDTF will also allow PHAs to use this funding on any eligible activity under the Capital Fund Program. Further, HUD is providing a lengthier transition to DDTF to accommodate PHAs' concerns. It should be noted that the funding for the RHF and DDTF grants is taken out of the general Capital Fund Appropriation. In limiting the DDTF funding to 5 years, the funding that would have gone to only specific PHAs receiving 10 years of RHF funding, will now be distributed among all of the PHAs receiving a Capital Fund formula grant. Issue: Several commenters objected to the apparent retroactive date of the change to RHF. HUD Response: The changes to the RHF grant program will not be retroactive, but will be implemented starting in FFY 2014, which should ameliorate the impact. Issue: In order to compensate for RHF grants that will be “lost” under this provision, PHAs should have the freedom to select higher-income applicants. HUD Response: Under this final rule, PHAs that have demolished or disposed of units, and have begun to receive first-increment RHF funding as of FFY 2014, will be eligible for an additional 5 years of DDTF. Other PHAs will have significant advance notice that they will be eligible for only 5 years of DDTF and can do their financial planning accordingly. Finally, there is no direct nexus between funding for replacement housing and admission of higher-income residents. Issue: The change to RHF funding is contrary to the statutory requirement that the Capital Fund formula be developed by negotiated rulemaking. HUD Response: The statutory requirement of section 9(f) of the 1937 Act (42 U.S.C. 1437g(f)), is that “the formulas . . . shall be developed according to procedures for issuance of regulations under the negotiated rulemaking procedure. . . .” HUD interprets this to mean that the formulas are initially developed by negotiated rulemaking, not that each subsequent revision requires negotiated rulemaking. HUD previously fulfilled this statutory obligation to this regulation (see HUD's final rule published on September 14, 1999 at 64 FR 49924). Issue: Funding for small numbers of units. Some PHAs disposed of or demolished small numbers of units at various times, which resulted in RHF allocations too small to acquire or develop any replacement units. PHAs should be allowed to use funds that fall below certain thresholds for other public housing uses, such as modernization. One commenter stated that HUD should consider setting a minimum threshold for RHF funding, below which a PHA may elect to use it for general Capital Fund purposes and not replacement housing. HUD Response: The final rule addresses these issues by providing that the 5-year DDTF be given to PHAs in their Capital Fund formula grant. The formula grant, along with the increment that has been added, can be used for any Capital Fund eligible purpose, including development of replacement housing or modernization. Issue: The rule should include an exception where PHAs that demonstrate hardship will be eligible for a second increment of RHF funding. Hardship could include, but not be limited to, in- process development projects that anticipated second-increment RHF funding and localities with critical shortages of affordable housing. HUD Response: The final rule addresses the issue of in-process development by extending the transition and providing for DDTF. As for other forms of “hardship,” such as shortages of affordable housing, HUD already provides funds for housing development and for vouchers, among other forms of funding. Eligible Activities and Costs Issue: Is the phrase “public housing capital assistance” in § 905.314(b) intended to be broader than “Capital Funds?” If so, other included funding sources should be specified. HUD Response: HUD has added a definition of “public housing funds” in § 905.108 that encompasses a broader source of funds. Issue: A commenter stated that the language in proposed § 905.202 designating those items that are “not modest in design and cost,” or not “customary for the locality” as ineligible is overly broad and could disqualify many green and energy conservation measures and complicate the use of Capital Funds for all but the simplest of projects. HUD Response: Green and energy conservation measures that do not otherwise qualify as eligible activities will be covered by the TDC exception found in § 905.314(c) of this final rule. Further, it has been long-standing regulatory description and PHA practice to design, construct, and equip public housing units to improve substandard conditions and to harmonize with the neighborhoods they occupy, meet building standards, and achieve modest levels of comfort and liveability for the low-income public housing residents to be served, and all at a reasonable costs as defined under TDC. See e.g., former 24 CFR 941.203 and 968.112(b) and (o). Issue: Add “except for emergencies” to proposed § 905.202(b), which identifies activities and costs not identified in the 5-year action plan as ineligible costs. HUD Response: This final rule clarifies that emergencies that are not identified in the 5-year action plan are eligible costs. Issue: The proposed regulation at § 905.202(g) uses a test for ineligible costs (“in excess of the amount directly attributable to the public housing units”) that may be read more literally than is appropriate. In a mixed-finance project, for instance, are the common areas “directly attributable” to the public housing units? Costs should be deemed ineligible when they are disproportionate to the benefit received by the public housing program in relation to other programs, or similar standard. The commenter also states that in § 905.314(a), the concept of “costs directly attributable to the public housing program” should be replaced with a reasonability or proportionality concept. The commenter also states that it is inappropriate for HUD to reserve the right in § 905.202(i) to retroactively find costs ineligible, when such costs otherwise came within the definition of eligibility and did not violate some standard set forth in the rulemaking provisions of the Administrative Procedure Act (APA) (5 U.S.C. 501 et seq. ). Another commenter stated that the “directly attributable” standard does not provide a standard by which a PHA can justify a cost's eligibility. This commenter states that the principles for cost allocation in OMB Circular A-87 (Cost Principles for State, Local, and Indian Tribal Governments) should be the basis for the eligibility determination. HUD Response: HUD disagrees. While concepts such as proportionality and reasonability are subjective, direct attribution to the intended purpose of the funds is objective. In general practice, the objective measures would not exclude eligible costs along the lines of what the commenter claimed. By requiring direct attribution to public housing, HUD is ensuring responsible use of government funds, and acting in accordance with 2 CFR Part 225. As to the APA issue, the APA requires public notice and an opportunity to comment on the rule itself, which the public has received regarding this rule. Each individual decision that may be made under this rule is not subject to additional notice and comment. On the contrary, it is entirely lawful for federal agencies to reserve discretion over managing their own programs. As to OMB Circular A-87, Cost Principles for State, Local, Indian, and Tribal Governments, now codified at 2 CFR part 225 (part 225), the final rule cites part 225 in relation to reasonable costs, and as one test for ineligible costs under § 905.202(d). However, by suggesting that 2 CFR part 225 be the sole test for the connection between the costs and the public housing program, the comment misunderstands the nature of the circular. Part 225 is designed to identify basic principles, not to take the place of specific program regulations. Part 225 states, inter alia, “The principles are for the purpose of cost determination and are not intended to identify the circumstances or dictate the extent of Federal or governmental unit participation in the financing of a particular program or project.” (See 2 CFR part 225, Appendix A, General Principles for Determining Allowable Costs, at § A.1). Also, part 225 states that allowable costs must conform to “governing regulations as to the types or amounts of cost items.” (See Id. at § C.1.d). By requiring direct attribution to public housing, HUD is acting well within the scope of 2 CFR part 225, its statutory authority, and APA principles. Issue: While § 905.200(b)(12) makes approved homeownership activities eligible, some activities—such as relocation assistance, mobility counseling, and homeownership counseling—may appropriately occur prior to the approval of a specific homeownership plan. After the introductory phrase “activities associated with approved homeownership,” the rule should add “provided, however, that activities under sections C and D may occur prior to approval of the homeownership plan.” HUD Response: Resident relocation and mobility counseling, which includes those items mentioned in the comment, are separately eligible under § 905.200(b)(10) of this final rule. While the physical relocation has to be after the approval of the homeownership plan, the mobility counseling and surveying of the tenants can be done at any time. However, as the section in question does not specify the need for a homeownership plan or timing in relation to it, no rule revision is required. Issue: Under § 905.312(a), are amenities such as air conditioners, dishwashers, washing machines and dryers eligible costs, or prohibited luxuries? HUD Response: HUD agrees that some further clarification may be helpful with respect to amenities. This final rule clarifies that air conditioning is an eligible modest amenity. Further clarification on luxury items and modest amenities will be provided in future guidance. Issue: Are Capital Funds eligible to be used to construct office, resident service, or maintenance facilities? HUD Response: Yes. Issue: How does § 905.202(f), on direct provision of social services, relate to management improvements, and could HUD provide some examples? HUD Response: Section 905.202(f) provides that direct provision of social services is not an eligible Capital Fund expense. Examples of such ineligible expenses, provided in the rule, are salaries for social workers or General Educational Developmental (GED) teachers, and this prohibition would apply to other benefits for such workers as well. Statutorily, under 42 U.S.C. 1437g(d), services simply are not Capital Fund eligible costs; rather, the costs of the provision of services may be an operating cost under the Operating Fund as provided in 42 U.S.C. 1437g(e)(1)(D). While it is not entirely clear what the commenter means by “relate to management improvements,” the commenter appears to be asking whether these types of costs may nonetheless be permitted under the Capital Fund as management improvements. Eligible management improvements under § 905.200(b)(7) of this rule include activities that have a linkage between the management improvement and the correction of an identified management deficiency. Generally, the ineligible social services expenses about which the commenter asks would not be tied to management in such a way as to make them eligible as management improvements. HUD may issue further guidance on this subject in the future. Issue: One commenter states that, in § 905.200(b)(8), the discussion of eligible resident self-sufficiency activities refers to funding from the Operating Fund for $25 per-unit, per-month, for resident participation. The commenter states that Operating Fund rule at 24 CFR 990.190(e) references only $25 per annum. HUD Response: This statement is corrected in this final rule. Issue: The examples of Capital Fund-related legal costs at § 905.200(b)(13) are too limited and should be expanded. Costs that specifically should be mentioned include: negotiating and drafting mixed-finance arrangements; negotiating and reviewing property descriptions; title policies, regulatory interpretation, opinions, drafting, reviewing, and negotiating evidentiary documents for mixed-finance development, the Capital Fund financing program, conventional development, and acquisition transactions. HUD Response: Unfortunately, existing funding does not allow every potential legal cost that one can envision to be expressly included. All of the legal costs mentioned in the comment would be eligible if they were reasonable in cost and related to the Capital Fund development activities. However, this rule is not intended to be an exclusive list of eligible and Capital Fund-related legal costs. Issue: Section 905.200(b)(7)(iii) (“Activities that include or foster equal opportunity”) should be revised to include Limited English Proficiency(LEP), Reasonable Accommodation, and Violence against Women Act (VAWA) policies and their implementation as part of equal opportunity requirements. HUD Response: Housing counseling for residents and prospective residents, as well as the design and construction of accessibility improvements, are eligible under the Capital Fund. (See §§ 905.200(b), 905.200(b)(7)(i) and (iv) and 905.200 (b)(10) of the rule.). Generally, a PHA would use operating subsidy or other noncapital resources for staffing and program materials for LEP or VAWA, rather than management improvements under the Capital Fund. Issue: Proposed § 905.200(b)(4) states that vacancy reduction may be an eligible activity. It would be helpful for the rule to be more explicit about what is expected, either in the rule itself or in guidance. Also, compliance with accessibility requirements should be explicitly mentioned under proposed § 905.200(b)(6) and should be more specific. HUD Response: HUD is making no change to the final rule text, but may issue future guidance on this and other issues. As to accessibility specifically, § 905.312 addresses accessibility requirements. Issue: The rule should allow set-asides of capital replacement reserves for future modernization as an eligible activity. The inclusion of “modernization” as an eligible activity in section 9(d)(1)(A) of the 1937 Act (42 U.S.C. 1437g(d)(1)(A))— coupled with the authorization to accumulate funds to undertake modernization, substantial rehabilitation, or new construction of units in section 9(j)(1)(B) of the 1937 Act (42 U.S.C. 1437g(j)(1)(B))— should be sufficient legal basis to allow for such capital replacement reserves. HUD Response: Replacement reserves as such are not an authorized use of Capital Funds under section 9 of the 1937 Act (42 U.S.C. 1437g). Under section 9(j)(1)(B) of the 1937 Act (42 U.S.C. 1437g(j)(1)(B)), accumulated funds for modernization are required to be expended within 24 months once sufficient funds are accumulated to undertake an activity. Issue: Subpart B, starting at § 905.200, should have more precise language describing what is covered by the subpart. HUD Response: HUD agrees and has made the suggested revision at § 905.200(a) of this final rule. Issue: The term “significant” in the phrase “. . . PHA must have determine that there is no debt service payments, significant Capital Fund needs, or emergency needs that must be met prior to transferring 100 percent of its funds to operating expenses” in 24 CFR 905.314(1)(2) should be clarified. HUD Response: HUD is considering issuing guidance to assist HUD field offices and PHAs with what information should be evaluated prior to allowing a small PHA to transfer all of its Capital Funds to Operations. Federalization and Federalism Issue: The rule should clarify the meaning of § 905.602(c) of the proposed rule, prohibiting federalization of certain projects. One commenter stated that the rule should provide that federalization is prohibited except as otherwise approved by HUD. Another commenter stated that there is no authority for prohibiting nonfederal public housing owned by a PHA from being federalized as provided in that section and that such policy is not in the interest of preserving affordable housing. Another commenter noted that the only authority for allowing federalization is found in section 9(n) of the 1937 Act (42 U.S.C. 1437g(n)), and that any such language should be carefully limited to apply only to “covered locally developed public housing units” as defined in section 9(n). This commenter stated that there is no other statutory authority to limit a PHA's decision to bring PHA-owned properties into the public housing program, subject to the HUD approvals generally required for public housing development. In some instances, such units may provide the most economical and best opportunities for the production of replacement public housing. HUD Response: This final rule revises proposed § 905.602(c) titled “Federalization,” to make a more general statement that nonpublic housing properties may be used in the development of public housing units provided all requirements of the 1937 Act and the development requirements of this part are met. For historical reference, former section 9(n) of the 1937 Act was never used by HUD to federalize projects. Former section 9(n) was repealed by the Consolidated Appropriations Resolution, 2003 (Pub. L. 108-7, 117 Stat. 1, approved February 20, 2003; see 117 Stat. 502) with additional directions applicable to “covered locally developed public housing units” in the states of New York and Massachusetts. HUD's regulation at § 905.602(c) is neither a development exception nor a new development method relying on any form of prior authority relating to Federalization. Instead, HUD may consider any property presented for development of public housing units under all of the existing requirements of the 1937 Act and 24 CFR part 905. Issue: HUD's proposed regulation at § 905.602(c) should be revised to provide that a PHA may acquire and modernize a building that it already owns outside the public housing system, if that same modernization would be permitted for new construction under § 905.602(b). HUD Response: Section 905.602(c), both as proposed and in this final rule, allows this activity to occur. Issue: This rule triggers Executive Order 13132 on Federalism. This rule opens the public housing market to private partnerships with restrictions on the public on obtaining information and attending meetings, and without the accountability required for use of public funds. The commenter states that planning issues are under the jurisdiction of local municipalities under state requirements. HUD Response: Executive Order 13132 on Federalism concerns regulations and proposed legislation that have substantial direct effects on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government. This regulation does not have these direct effects on states or on the relationship between the Federal Government and the states. This rule, which is authorized by statute, establishes substantive regulations and procedures for the use of federal funds by PHAs, as directed by statute, and does not preempt state law. Therefore, this rule does not trigger the Executive Order. Conversion of Units Issue: A commenter states that § 905.10(f)(3) as codified prior to the effective date of this final rule indicates that the total estimated need of the development is unchanged by conversion of units. The commenter states, however, that the preamble to the final rule adopting the existing regulation explains that “reduction of units is not based only on demolition or disposition.” If the intention of the new Capital Fund rule is not to change the formula, the language of the current rule regarding conversions should remain. The commenter expressed concern about the impact of this rule, considering the unit conversion it must undertake at one of its developments. HUD's policy, as stated in the proposed rule, would result in a permanent loss that is difficult for a housing agency of a small size to absorb. If a small PHA has an outstanding Capital Fund Financing Program loan, the terms of which require maintaining its public housing stock to generate sufficient Capital Fund grants to sustain three-to-one debt service coverage, HUD's proposed rule also may mean that it cannot undertake the necessary reconfiguration without partial prepayment of the loan. The commenter further states that HUD's funding policy should encourage rather than discourage PHA action to convert efficiencies to one-bedroom units. Because PHAs have the same square footage to manage and renovate, it would be reasonable for the Capital Fund to build in the proper incentive by not taking away funds when conversions occur. HUD Response: The Capital Fund formula is based on a complex calculation with a variety of characteristics including, but not limited to, the number of units in the development, the average number of bedrooms, and the location and age of the development. Based on the way the formula is calculated, if one PHA has a larger formula share it reduces the formula share for other PHAs. It was never the intent of the Capital Fund formula to result in HUD continuing to pay the modernization needs or the administrative costs of units that no longer exist at one housing authority while making other housing authorities with modernization needs pay for them, which would be the result if the Capital Fund were used to pay for units lost to conversion. The incentive for reconfiguration or conversion for the PHA is to better serve the needs of the low-income families in the community. Furthermore, funding for reconfiguration or preparing units for conversion, and any necessary relocation, are eligible Capital Fund expenses. Issue: A commenter states that while the new rule specifically states that reconfiguration of units will alter Capital Fund formula funding allocations, this policy was not articulated in the Capital Fund rule prior to the proposed rule and may have unintended consequences, such as a decrease of subsidy to the agency. A commenter states that § 905.400(f)(3) differs from the current regulation, which is that conversion of public housing units does not change the Capital Fund formula shares. This proposed policy will discourage, for example, combining of unmarketable efficiency units into one-bedroom units. HUD Response: HUD is aware that some PHAs have been confused about the intent of the proposed provision, § 905.400(f)(3), as well as the current provision, 24 CFR 905.10. The purpose of this provision is to clarify HUD's policy as it has consistently been implemented. Issue: How does the limit on new units found at § 905.602(b)(1) apply to merged units? May a PHA replace merged units, and will the new units be eligible for Capital Fund and operating subsidy? HUD Response: This limit based on the number of units in management as of October 1, 1999, would remain the same. Thus, for example, if a PHA had a unit count of 100 as of 1999 and in FY 2005 the PHA decided to merge 6 efficiency units into 3 one-bedroom units, the PHA's unit count would be reduced to 97, and the PHA would be allowed to build 3 additional units. Separating CFP Informational Requirements From PHA Annual Plan Requirements Issue: Small PHAs should not have the same reporting requirements as large authorities and should operate as stated in HERA. Removing some reporting requirements from the annual plan and making their submission separate would result in small housing authorities being obligated to submit forms from which they are currently exempt. Even with the passage of HERA, small housing authorities continue to suffer from an excessive regulatory structure. HUD should not reestablish a regulatory burden that has been lifted by HERA. HUD should find a less burdensome method of receiving any necessary information, such as through an annual audit. HUD Response: These commenters appear to be referring to qualified PHAs, a category established under HERA as “a public housing agency meeting the following requirements: (1) the sum of public housing dwelling units administered by the public housing agency and the number of vouchers under section 8(o) of the 1937 Act is 550 or fewer, and (2) the public housing agency is not designated as a troubled PHA under section 6(j)(2) and does not have a failing score under SEMAP during the prior 12 months.” While qualified PHAs are exempt from submitting a PHA Annual Plan, they are not exempt from the requirement to hold an annual public hearing or to submit a 5-Year Plan. Further, HUD has authority under section 9 of the 1937 Act (42 U.S.C. 1437g) to obtain information needed to calculate the Capital Fund formula and monitor the implementation of the CFP. Issue: Large PHAs (over 550 units) that are required to submit both a PHA Annual Plan and a Capital Fund program submission should be able to submit those documents at the same time as permitted under current rules. A key goal of the PHA planning process under section 5A of the 1937 Act (42 U.S.C. 1437c-1) is to unify and consolidate PHA planning and reporting requirements from the various programs that PHAs administer in order to create efficiencies for PHAs and HUD, and also to provide residents and the community with an opportunity to review the PHA's plans holistically. The changes included in this proposed rule may have the impact of requiring a second public process, reducing efficiency, and creating confusion in the community about the opportunities for input. If a PHA submits their annual plan, and then subsequently submits a Capital Fund budget that alters the annual plan, the PHA will be required to hold a second public hearing process, unnecessarily burdening PHAs. A commenter states that a separate public process from developing the agency plan should not be required. Combining these processes has worked well. The commenter also stated that it is difficult to get resident participation and that all parts of a PHA are tied together and should be discussed in total, rather than the context of individual meetings. The commenter concluded that combining this public consultation has worked well for over 10 years. Decoupling the capital planning from the overall agency planning will make it more difficult to see the big picture of the PHA, require more administrative time and expense for the PHA with separate resident advisory board actions, and make it more challenging for the PHA Board to pass an agency budget that contains both operating and capital expenditures. Furthermore, it may not be feasible to schedule a resident meeting and a Board of Directors meeting in time to comply with HUD deadlines for submission of the ACC Amendment. This commenter suggests HUD extend the deadlines. HUD Response: HUD's regulations at § 905.300(b)(3)-(4) are revised in this final rule to clarify that the PHA is to present the Capital Fund submission to the public and its residents and Resident Association Board (RAB) concurrent with the public hearing being held on the PHA Annual Plan. By making these submissions concurrent, the PHA will be able to present an integrated plan for public housing to the community and to the RAB. The PHA must consider the recommendations of the RAB concerning both the PHA Annual Plan (under current 24 CFR part 903) and the Capital Fund submission, and these submissions must be consistent with any applicable Consolidated Plan. This final rule further clarifies that the required forms and information on the Capital Fund submission will be submitted along with the Annual Contributions Contract Amendment submitted to HUD when the annual Capital Fund awards are made. Issue: How does HUD have the discretion to require separate reporting requirements for the Capital Fund activities, considering that certain items, such as capital improvements and asset management, are required to be in the PHA Plan? HUD Response: The PHA Annual Plan requirements are satisfied with general information, as opposed to the more specific information required for Capital Fund formula purposes. They are not the same requirements. Issue: The language regarding budget submission requires clarification. According to a commenter, the proposed rule states that: “The PHA's budget must be approved by the PHA's Board of Commissioners, but does not require HUD approval (see § 905.300(b)(1)).” If that in fact is the case, why require the budget to be submitted to HUD when the CFP ACC is submitted to HUD? The proposed rule should state that the budget must be approved and therefore gets submitted to HUD for review and approval, or that the PHA's budget must be approved by the PHA's Board of Commissioners, and does not need to be submitted to HUD for its review and approval. One commenter states that PHA Board approval only should be required. HUD Response: This final rule revises § 905.300(b)(1)(iv) to state that the PHA's 5-Year Action Plan and budget must have been approved by the PHA's Board of Commissioners before it is submitted to HUD for review and approval. Under the current process for Qualified PHAs HUD reviews the PHA's budget for eligible activities and compliance with cost limits and other requirements. The HUD review is tantamount to HUD approval. Therefore, the language has been changed to signify that HUD approval is required. Issue: HUD should provide additional funding to defray the cost of the PNA inspection. Another commenter questioned whether PNA inspections would be conducted by PHA staff or outside firms, thus resulting in additional costs. Another commenter stated that the rule should provide more details about the PNA. Another commenter stated that the PNA should be a flexible planning tool and not impose requirements. HUD Response: The PNA is currently addressed in a separate rulemaking (see HUD's proposed rule published on July 20, 2011, at 76 FR 43219), which provides details on the PNA. Unfortunately, due to constraints on funding, HUD cannot provide extra funds for this purpose. 2 2 Please see footnote #1 for more information. Issue: A commenter stated that in § 905.300(b)(3) the reference relating to the PHA Annual Plan is confusing as the CFP is being decoupled from the PHA Annual Plan process. The commenter questioned whether HUD is requiring a separate consultation via the processing of the PHA Annual Plan or it can be a stand-alone process. Another commenter states that decoupling CFP requirements from the PHA annual plan is “essential to guaranteeing resident input”; however, it may also be beneficial to maintain explicit requirements for resident meetings and input. HUD Response: In this final rule, most cross references in § 905.300(b) to 24 CFR part 903 are removed and § 905.300 is expanded to include sections on resident and RAB participation, public hearings, definition of significant amendment, criteria for plan revision, and procedures for HUD review and approval. These changes should ensure that the decoupling is complete. Development, Redevelopment, and Modernization Issue: Since this regulation replaces part 941 in full, whenever the rule regulates the development process, it should refer not only to Capital Funds, but also HOPE VI, Choice Neighborhoods, development funds, and other sources appropriated by Congress for the development of public housing. HUD Response: This final rule includes a definition of “public housing funds” at § 905.108 to provide this broader definition. Issue: Proposed § 905.314(g) provides that the modernization cost limit is 90 percent of TDC. One commenter suggests that the rule allow determination for redevelopment to be made when modernization costs reach a lower threshold such as 70 or 80 percent. In such cases, when the community believes such modernization expenditures would not be prudent use of federal financial assistance, such a community or PHA should be able to decide instead to demolish and develop new affordable housing. HUD Response: Demolition of public housing is governed by section 18 of the 1937 Act (42 U.S.C. 1437p) and is beyond the scope of this rulemaking. Issue: The reference to Capital Fund financing in proposed § 905.600(c) is unclear. HUD Response: Proposed § 905.600(c) on Capital Fund financing is revised in this final rule. HUD's final rule on Capital Fund financing (see final rule published on October 21, 2010, at 75 FR 65208) is incorporated in subpart E of this final rule. Issue: Proposed § 905.600(d) suggests that a PHA or a PHA's partner would solicit construction bids after approval of a development proposal. At least in the mixed-finance environment, a final development proposal cannot be submitted without a firm construction price. HUD Response: In this final rule, HUD's regulation at § 905.600(c) on the development process is revised. HUD does not dictate when a PHA or a PHA's partner solicits construction bids. However, the PHA must submit, as part of its Development Proposal (§ 905.606), an independent construction cost estimate or actual executed construction contract that supports the permanent and construction budgets for the project. Issue: Proposed § 905.600(e)(7) should refer to “proceeds” of an Operating Fund Financing Program (OFFP). HUD Response: This final rule makes this revision at § 905.600(d)(8). Issue: Proposed § 905.202(h) is overbroad and could be read to prohibit temporary or bridge funding. HUD Response: This section, at § 905.202(i) of this final rule, refers to costs that are actually funded by a duplicate source and temporary or bridge financing does not result in duplicate funding. Issue: Section 9(l) of the 1937 Act (42 U.S.C. 1437g(l)) allows for capital- and operating-fund-only transactions, and permits HUD to reduce the period during which the property must be operated according to Public Housing Requirements. However, the proposed rule does not reflect this flexibility. Also, following the statute, the rule should allow PHAs to make section 8 assistance available in cases where there is operating assistance but not Capital Fund assistance. HUD Response: Generally, the reference in § 905.304(a)(3) to “such shorter period as permitted by HUD by an exception” implements the flexibility under 42 U.S.C. 1437g(l). In the case of mixed-finance specifically, § 905.604(j)(3)(ii) states that the term of the ACC Amendment will be determined based on the assistance provided under § 905.304, “unless reduced by the Secretary.” Also, if the PHA is no longer able to provide operating subsidy, final rule § 905.604(j)(3)(iii) permits early termination of the DOT or Declaration of Restrictive Covenants and provides public housing residents with a relocation option, which may be a unit in another project or a Housing Choice Voucher. Issue: A commenter stated that the proposed regulation at § 905.312(c)(1) should not refer to outdated Handbook 7485.2 REV. HUD Response: This handbook is not referenced in the rule. Mixed Finance Issue: All provisions of this rule should be premised on the belief that the interests of all participants are advanced if the regulations permit a predictable and efficient restructuring such that a project can be operated on a stable basis with whatever level of federal subsidy is reliably available. HUD Response: Along with statutory compliance, this rule also provides for sufficient flexibility to meet project goals. Issue: The rule should provide more extensive standards. The articulated standards in the proposed rule bridge the gap about halfway—they include some substantive standards, yet do not include some of the fundamental “rules” that have developed over the years regarding, for example, funding and replenishing of reserves and required segregation of public housing funds (both direct subsidy and tenant rents) from attachment in the case of foreclosure or loan acceleration. HUD Response: The types of issues to which the commenter refers are matters of policy and procedure that are best stated in guidance, such as PIH Notices and policy statements. Issue: HUD's regulation at § 905.600(d) should be revised to take into account that, in mixed-finance, the construction contract is virtually always signed before proposal approval. Accordingly, the second sentence of § 905.600(d)(3) should be revised to remove the phrase, “After HUD approval of the development proposal. . . .” HUD Response: This final rule adopts, at § 905.600(c)(3), this revision to accord with general industry practice. Issue: Commenters questioned language suggesting why the mixed-finance category includes projects funded entirely with Capital Funds. HUD Response: If there is an Owner Entity other than the PHA, the project is considered mixed-finance even if 100 percent of the funding is public housing Capital Funding. However, if the PHA holds a 100 percent interest in the project, it is not a mixed-finance project. Issue: The rule is overbroad in requiring the formation of an “Owner Entity” in situations where nonpublic housing sources are being utilized, but no third-party participation in the ownership is required. There are instances, where state or local resources may be used, where the rule would seem to require another entity, but the transaction should not require the PHA to go to the expense of establishing and maintaining a separate Owner Entity. HUD Response: This final rule revises § 905.604 to clarify this role of the Owner Entity. The partnership arrangement to which the commenter refers applies in mixed-finance situations; where the PHA owns 100 percent of the units, mixed-finance development would not apply. Issue: Proposed § 905.604(a) should be revised to reflect that in some cases, such as meeting Davis-Bacon requirements, only the mixed-finance owner can comply; the PHA can require compliance, but cannot directly comply itself. HUD Response: HUD agrees, and this final rule incorporates the suggested change at § 905.600(a). Issue: HUD's regulation at § 905.604(h), “Irrevocability of financial commitment,” should allow alternatives to the opinion of counsel. The opinion of counsel will not always be feasible to obtain. HUD Response: The opinion of counsel as to irrevocability is an option, not a requirement. Please note that this final rule places this material at §§ 905.606(a)(6)(iii)(A) through (D). Issue: HUD's regulation at § 905.604(h)(1) states that, to ensure the irrevocability of funds, that the PHA or the Owner Entity be “ready willing, and able” to attain milestones. Also, the conditions in the legal documents must be “commercially reasonable.” These terms are vague and could lead to a finding of noncompliance if an auditor applies a different definition of commercial reasonableness. HUD Response: This final rule, in § 905.606(a)(6)(iii)(A), revises this terminology to avoid ambiguity. The contractual conditions must be “generally consistent with similar affordable housing transactions,” and the PHA or Owner Entity must know of no “impediments that would prevent the project from moving forward consistent with” the project milestones. Issue: The requirement in proposed § 905.604(h)(3), that counsel has examined the availability of financing, seems to mean that counsel will examine the funding for the funding source, which may be feasible in some cases, such as funds received from a city, but not in the case of bank or Assisted Housing Program (AHP) funds, because those entities will not reveal their funding sources. HUD Response: This proposed section (now at § 905.606(a)(6)(iii)(D)) is revised in this final rule to clarify that it is the participating parties' financing that is examined. Issue: In the case of operating-fund-only assistance under proposed § 905.604(k), one commenter stated that the provisions that require use restrictions to continue for a substantial and virtually indefinite period, whether or not there is operating subsidy to support them, are highly problematic for mixed-finance deals. The full flexibility permitted by 42 U.S.C. 1437g(l) should be utilized in order to give lenders and investors assurance that if sufficient subsidy ceases to be available, they will be promptly released from the obligation to house people who require such subsidy. In operating-fund-only projects, in such cases, section 8 assistance should be used to allow residents to remain if they wish. HUD Response: This final rule implements the ability for HUD to reduce the use restriction period found in 42 U.S.C. 1437g(l) (see § 905.604(j)(2)(ii) and (iii)). If the use restrictions are terminated, the PHA must provide residents with a decent, safe, sanitary, and affordable unit to which they can relocate, which may include a public housing unit in another development or a Housing Choice voucher. Issue: Proposed § 905.608, which covers the site acquisition proposal, only applies to acquisition with Capital Funds and should include acquisition with all available sources, including HOPE VI and other funds. HUD Response: This final rule adds a definition of “public housing funds” to include not only Capital Funds, but also HOPE VI, Choice Neighborhoods, development funds, or any other funds appropriated by Congress for public housing development. Issue: There is no justification in § 905.608(f) for stating that, absent HUD approval, the purchase price may not exceed the appraised value, because the federal interest in cost reasonableness is generally accomplished by TDC rules. HUD Response: TDC is applicable to new development and acquisition of existing housing. The TDC operates as a constraint on excessive payments of public funds in the context of § 905.608 along with HUD's requirement for a PHA to provide an appraisal of the property. Issue: Proposed § 905.612(b)(2) on mixed-finance drawdown ratios is unclear as to whether the requirement applies only to the final drawdown ratio or to interim ratios as well. HUD Response: This final rule clarifies this paragraph to refer to the overall drawdown ratio. Issue: While the rule requires that HUD funds be drawn down in the same ratio as other funding sources, projects are more economically feasible when interest-free HUD funds can be drawn first. HUD Response: HUD's regulation at § 905.612(b)(2) clarifies that upon completion of the project, the ratio of public housing funds to non-public housing funds for the overall project must remain as reflected in the executed documents. The ratio does not apply to the construction period. Issue: HUD's proposed regulation at § 905.604(b)(6) should be revised to acknowledge that Public Housing Requirements do not apply to non-mixed-finance development. HUD Response: This section is clarified in the final rule. Public Housing Requirements apply to public housing-related work or mixed-finance development as meant in this subpart. Issue: Proposed §§ 905.316, 905.318, and 905.320(b) and (c) appear to apply to both mixed-finance and conventional development, yet this is not clear from their language. HUD Response: This final rule clarifies these sections. Issue: HUD's proposed regulation at § 905.604(a) is unclear as to whether it applies only to the PHA, mixed-finance owner, or both. HUD Response: This final rule revises this section. Final § 905.604(a)(1) explains the possible ownership structures under mixed-finance. Issue: Rather than stating that mixed-finance contracts should “specify that they comply” with listed requirements, mixed-finance contracts should be required simply to contain no provisions inconsistent with the applicable regulations. HUD Response: An affirmative statement of compliance provides a basis for HUD to take enforcement action if the statement is untrue, which is an assurance that HUD requires when committing public funds. Issue: The rule should codify the authority to retain the original DOFA that existed prior to a mixed-finance transaction. HUD Response: The rule codifies the current practice. In § 905.604(a)(4) of this final rule, the Department will retain the date of full availability (DOFA) if a PHA is doing mixed-finance modernization. Issue: The rule should be more specific as to the minimum information required by a PHA for the release funds for predevelopment assistance under proposed § 905.612(a)(3). Response: HUD reviews each mixed-finance project separately, as the structure and financing of each project is unique. HUD has issued “Cost Control and Safe Harbor Standards for Rental Mixed-Finance Development,” which contains provisions related to predevelopment expenses. Further, HUD has internal mechanisms for evaluating each mixed-finance project and issues that arise within the context of mixed-finance development. These mechanisms are the best way to manage mixed-finance projects, including the use of public housing funds for predevelopment purposes. Therefore, to date, there has been no need to issue generally applicable guidance on the use of public housing funds for predevelopment expenses related to mixed-finance development. Issue: A commenter asked under what circumstance HUD would approve a PHA to exceed the 5 percent limit for predevelopment costs under § 905.612(a)(2). HUD Response: As the rule states, this will be determined on a case by case basis. HUD declines to speculate about the circumstances under which this may occur. Deviations Under Section 35(h) of the 1937 Act, 42 U.S.C. 1437z-7(h) Issue: A commenter stated that additional flexibility for mixed-finance projects is considered helpful, for instance flexibility with rent and income eligibility requirements for projects with 20 percent or more nonpublic housing units. Another commenter stated that the threshold should be the lesser of 10 percent or 10 units. Another commenter stated that such flexibility should be granted for all public housing stock. HUD Response: HUD's regulation at § 905.604(k) of this final rule provides flexibility where a PHA has a project in which a “significant number” of units are other than public housing units, following the statutory language under section 35(h) of the 1937 Act (42 U.S.C. 1437z-7(h)), which addresses mixed-finance development. The statute allows deviations under the specific statutory conditions stated, which do not apply to all public housing stock. Issue: The standard for allowing “restructuring” is too limiting and “HUD should expand it to the extent interpretation permits, and should generally recognize the ability of parties to make restructuring decision outside this standard where the standard need not be applied.” This commenter states that the phrase “reduction in appropriations” is meaningless without a recognized starting point, and suggests that the per-unit appropriations in 1998 would be a reasonable starting point for interpretation. In addition, any definition should recognize the likelihood of continuing inflation; a flat appropriation over 10 years would be the equivalent of a 50 percent effective reduction in funding at an inflation rate of 7 percent. This commenter states that HUD may interpret “reduction in appropriations” to be a reduction in the present value of the per-unit appropriation available. This commenter also states that HUD should recognize that many Regulatory and Operating (R&O) Agreements, for good reason, limit the operating-subsidy pass-through obligation of the PHA with reference to what the PHA is receiving from HUD. For instance, an R&O Agreement might provide for the PHA to pass through 90 percent of what it actually receives for that project. In literal terms, such a PHA is never prevented by a funding reduction from meeting its obligations, because its obligations automatically decrease, yet clearly a project receiving 50 percent of its intended subsidy would be in deep trouble and require deviation under section 35(h) of the 1937 Act. The commenter states that skilled drafters could provide alternate 35(h) triggers, such as a PHA failure to provide alternate non-operating subsidy funding in specified circumstances. This commenter states that “HUD needs to take care that it does not carelessly eliminate these triggers.” This commenter states that the rule eliminates these triggers by replacing the statutory phrase “from meeting its contractual obligations” with “from providing Operating Funds as provided in its contractual agreement.” HUD Response: This final rule implements the statutory authority correctly, and the statute is unambiguous in referring to “a reduction in appropriations under section 1437g,” meaning an actual reduction in appropriations from Congress, not a change as a by-product of inflation. HUD recognizes that projects are structured differently. For this reason, this final rule removes the proposed section on “Allowable Deviations.” HUD encourages PHAs to draft R&O agreements that clearly address the issue of reduction in appropriation and clearly identify a “starting point,” or baseline amount, from which a reduction in operating subsidy caused by a reduction in appropriation can be calculated. In addition, as requested by the commenter, to avoid unintended impacts, HUD has revised the language in the final rule concerning a public housing agency's inability to meet its contractual obligations to mirror the phrasing in the statue. Issue: HUD should propose to Congress legislation allowing deviations from Public Housing Requirements that do not rely on section 35 of the 1937 Act (42 U.S.C. 1437z-7). HUD Response: HUD, through rulemaking, interprets and implements enacted legislation. The subject of proposing additional legislation is beyond the scope of this rulemaking process. Issue: A commenter stated that the allowable deviations in the proposed rule are too limiting and unclear. For example, it is not clear if the “increased public housing rents” contemplated by proposed § 905.604(n)(2)(i) are different from those contemplated by proposed § 905.604(n)(2)(iii). More generally, HUD should not require a complicated sequencing of remedies; each situation will be different, and the paramount requirement for this rule is that it gives the PHA and owner the ability to design a restructuring plan appropriate to their circumstances. Commenters objected to specific allowable deviations in the proposed rule. A commenter stated that limiting a rent increase under proposed § 905.604(n)(2)(iii) to the “amount strictly needed” is too inflexible. One commenter stated that the rule should not allow PHAs to eliminate eligibility restrictions altogether as contemplated in § 905.604(n)(2)(ii). HUD Response: The allowable deviations are removed in this final rule in favor of a case-by-case approach, under which the Owner Entity will submit an Alternative Management Plan, which HUD will review. Issue: HUD's annual reevaluation and approval of the transformation plan under proposed § 905.604(n)(5) should provide that, once the annual update is properly submitted, the existing plan remains in effect pending HUD action. HUD Response: The intent is for the existing plan to remain in effect until HUD disapproves it or approves a change. This final rule revises § 905.604(k)(4) accordingly. Issue: One commenter stated that the tenant protections in § 905.604(n)(2)(iv) should be limited to 2 years; otherwise, if a PHA has limited resources to relocate tenants, it may be unwilling to act and leave the mixed-finance owner without a remedy. HUD Response: The proposed regulation at § 905.604(n)(2) is removed in this final rule. The regulation at § 905.604(k)(2)(ii)(C) addresses tenant protections and states that the responsibility for relocation is with the PHA or as included in the agreement between a PHA and the Owner Entity. The PHA should address this issue when negotiating its Regulatory and Operating Agreement with an Owner Entity. Issue: The requirement in proposed § 905.604(n)(3)(iii)(D) that Public Housing Requirements be reinstated once the PHA restores operating subsidies to their normal level could be subject to misinterpretation, and deviations switch on and off from year to year. HUD Response: HUD will consider providing additional guidance on the timing of reinstatement in the future, based on experience with this issue. Issue: Proposed § 905.604(n)(3)(iv)(A) does not specify whether the reference to “reduced allocation of operating subsidy” refers to the subsidy provided by HUD or the subsidy passed through by the PHA. HUD Response: The statute on which this section is based refers to reduced appropriations; what is meant is a reduction in appropriations resulting in a reduction of subsidy allocation. This final rule clarifies this point at § 905.604(k)(2)(iv)(B). Issue: To ensure that project owners have pursued available alternative remedies prior to undertaking an Alternative Management Plan, the rule should require that project owners demonstrate that available development resources are being utilized to offset deficits with the public housing units. HUD Response: Along with eliminating the allowed deviations and requiring the PHA to submit an Alternative Management Plan, this final rule includes such a provision as part of the supporting documentation that a PHA will submit with its an Alternative Management Plan (§ 905.604(k)(2)(iv)(D)). Issue: One commenter states that proposed § 905.604(n)(3)(iv)(E), which requires prior expenditure of 50 percent of a named reserve, seems to contradict § 905.604(n)(2)(ii), which states that deviations from Public Housing Requirements are permitted only if the owner has expended all operating subsidy reserve funds put aside for this eventuality. A commenter states that this section should be eliminated, as requirements for operating reserves vary greatly in mixed-finance projects, and may not be appropriate for this use. HUD Response: This final rule, at § 905.604(k)(2)(iv)(D), removes an expenditure of reserve requirement and states more generally that the owner entity must use “all available means” to offset the reduction in appropriation or change in applicable law, including the use of other public and private development resources, the use of cash flow from any nonpublic housing units, funds from other operating deficit reserves, and so forth. Issue: A commenter states that to ensure that project owners have pursued available alternative remedies prior to undertaking an Alternative Management Plan, the rule should require that project owners demonstrate that available development resources are being utilized to offset deficits with the public housing units. HUD Response: This final rule at § 905.604(k)(2)(iv)(D) requires the PHA to provide documentation that the Owner Entity has used all available means to offset the impact of reduced operating subsidy. Issue: Commenter states that HUD's regulations implementing 35(h) of the 1937 Act (42 U.S.C. 1437z-7(h)) should take care to state that they do not affect, one way or the other, the ability of PHAs and their partners to restructure a project consistent with standard Public Housing Requirements. HUD Response: That section only applies to deviations from statutory requirements under the conditions specified. It does not affect mixed-finance arrangements consistent with statute and regulation. Issue: The word “solely” in proposed § 905.604(n)(3)(iv)(B)(“The deficit in operating revenues is attributable solely to the reduction in operating subsidy”), as such situations are likely to have multiple causes. HUD Response: This final rule uses the term “primarily” instead of “solely” (§ 904.604(k)(2)(iv)(B)). Issue: Deviations should be allowed for changes in law other than appropriations. HUD Response: The statute allows for deviations in the case of a reduction in appropriations or other change in law that makes a PHA unable to fulfill its contractual obligations with respect to a specific number of public housing units. This final rule implements this statutory authority at § 905.604(k). Issue: The reference to “contractual agreement” in § 905.604(n)(1) should be changed to “Regulatory and Operating Agreement (R&O),” which is more specific. HUD Response: There may be instances where an agreement is not through an R&O. Issue: A commenter states that implementation of “transformation remedies” (42 U.S.C. 1437z-7(h)) should be postponed until HUD has had broad discussions with stakeholders to ensure that appropriate protections remain in place for PHAs and residents. This commenter is particularly concerned about the potentially serious consequences of implementing a regulation that facilitates the loss of public housing units in the current political and economic environment. HUD Response: HUD, at this time, cannot predict how many or which projects will require such deviations, and views that the greater risk is that, without an Alternative Management Plan under the statute and regulations, units will be permanently lost, where under transformation the deviation may be temporary. By removing in this final rule the proposed paragraph allowing deviations automatically under certain conditions, HUD will review each request and apply oversight to the process. HUD submits that this is the best choice under current conditions. Issue: The proposed regulation at § 905.604(n) places the risk on PHAs regardless of the contractually agreed upon structure of a mixed-finance deal or the underlying business arrangement between a public housing authority and, for example, its private developer partner. The commenter states that one example is making the PHA responsible for tenant relocation, including moving costs (§ 905.604(n)(2)(iv)). This commenter states that in many mixed-finance transactions, investors require reserves to be sized, in part, to pay for relocation costs. Shifting responsibility to PHAs for such costs may not be part of existing deal structures and would result in a substantial realignment of risk in a mixed-finance transaction. HUD Response: This final rule provides for required relocation according to the contractual agreement between the PHA and the Owner Entity (see § 905.604(k)(2)(ii)(C)). Issue: The phrase “in HUD's sole discretion” should be removed from proposed § 905.604(n)(4). The commenter states that this phrase removes the issue from judicial review. HUD Response: While HUD does not agree with the commenter regarding judicial review, this final rule clarifies the review of an Alternative Management Plan, in § 905.604(k)(3), by providing examples of some, but not all, of the reasons why HUD might disapprove an Alternative Management Plan. Energy Conservation Requirements Issue: Many PHA commenters stated that HUD should not mandate energy conservation measures without giving PHAs the flexibility to determine their own priorities. The rule should make it clear that PHAs are not required to implement everything recommended in an energy audit, but that energy needs must be balanced against other PHA needs. Many of these PHAs supported energy conservation, generally. One commenter stated that if energy audits and their corresponding recommended energy conservation measures are to be relied upon clearly, established and standardized measurement systems should be established so that uniformity of results is achieved. If measurement standards and recommendations vary from audit to audit, Capital Funds could be continuously wasted from year to year based on the new and/or conflicting recommendations. One commenter stated that HUD and industry would benefit from more research and discussion on this topic. Other commenters stated that not all energy audits produce savings or are reliable and there could be burdens on PHAs. Some commenters stated that they are skeptical of a cost-effectiveness approach to spend Capital Funds. Other commenters suggested use of a 20-year, voluntary rolling base freeze on public housing utility consumption levels. One commenter questioned the cost effectiveness of energy conservation measures (ECMs), and also stated that there could be situations where an audit may find an ECM not to be cost effective, when in fact it is an improvement that the PHA should implement as part of a modernization. This commenter stated that return on investment (ROI) should always be a factor in determining whether or not it makes sense to implement a recommendation. Another commenter stated that in addition to ROI, health and safety, conflicting modernization schedules, and the validity of energy audit results need to be considered. One commenter stated that it should be determined whether using the funds for the energy conservation measures now would take away from future development needs or be premature. One commenter stated that energy trade-offs need to be easy to plan and implement, not burdensome and complicated. One commenter stated that in determining which energy conservation measures should be implemented, it is important whether the item is something that would have been replaced anyway. HUD Response: HUD is handling the energy audit process, ECMs, and ROI issues under a separate rulemaking (see the proposed rule of 76 FR 71287 et seq. ). The 20-year rolling base freeze relates to the current Operating Fund rule at 24 CFR part 990 and is outside the scope of this rulemaking. Issue: One commenter endorsed incorporating the International Energy Conservation Code (IECC) in various subsections of the proposed rule related to what types of projects are eligible for Capital Funds. The commenter suggested that HUD reference the 2009 IECC to promote energy efficiency over the life of those projects. One commenter stated that because the section specifies the required design and construction requirements for affected building projects, the International Building Code (IBC) and the IECC will also provide compliance with several other requirements listed in this section, including compliance with ASHRAE standard 90.1-2010, “Energy Standard for Buildings Except Low-Rise Residential Buildings,” an accepted alternative means of compliance with chapter 5 of the IECC. HUD Response: This final rule references the 2009 edition of the IECC, in §§ 905.200 and 905.312, rather than the 2006 IECC, and references the ASHRAE standard. Reductions in the Amount of Capital Funds for Management Improvements Issue: Commenters expressed concern about limiting the amount of Capital Fund budget that can be used for management improvements to 10 percent. Although PHA's on average only use 8 percent, the flexibility to go up to 20 percent is important and has a significant upside without a corresponding downside; for instance where PHAs need multiple infusions of capital for management improvement purposes at the same time, which may occur when a PHA becomes near-troubled or troubled. Also, such flexibility might be needed in an emergency. PHAs rarely use too much of their Capital Fund for management improvement, and HUD provides a solution to a problem that does not exist. Often there are statutory restrictions that prevent overly high usage, such as using 50 percent. HUD has not provided evidence that PHAs are mismanaging their Capital Fund for nonconstruction activities. It is counterintuitive that in a period of underfunding of PHAs, HUD would introduce a proposal that limits flexibility, authorized under statute, for PHAs to administer their CFP to meet local needs. PHAs need the flexibility to use limited funds to address the ever-growing capital improvements necessary to ensure continued assisted housing for low-income residents; therefore, the current rule should be kept as is. A PHA may need additional assistance for training, consulting, information technology upgrades, or security services and, with the prospect of being forced to use reserves for operational expenses during the next fiscal year, the use of CFP for management improvements will be crucial. One PHA commenter cited the need to pay a resident coordinator. Another commenter cited a possible need to upgrade computer systems and train users. Another commenter referenced “investments in technology,” community policing, and security measures. Another commenter cited the Americans with Disabilities Act (42 U.S.C. 12101 et seq. ) compliance, the Violence Against Women Act (VAWA) (Pub. L. 109-162, approved January 5, 2006), and the Limited English Proficiency programs. Another commenter cited the funding environment and projections of flat or declining funding. Another commenter cited resident training and service goals [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2013-23230. Public record. Not legal advice.